Preliminary analytical procedures for an audit client focusing on liquidity activity ratios find that the client's accounts receivable turnover ratio is significantly better than in previous years. The ratio is also significantly better compared to similar firms in the same industry. The results of this ratio indicate, preliminarily, that the accounts receivable area has been identified as having increased risk to the auditor.

Question

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A significantly better accounts receivable turnover ratio compared to previous years and to similar firms in the same industry suggests that the company is collecting its receivables more efficiently, which would generally be viewed as a positive indicator of liquidity and operational efficiency, not as an increased risk area.

Preliminary Analytical Procedures for an Audit Client Focusing on Liquidity